There’s a subscription for that.
Every time someone says ecommerce innovation is dead it rises from the ashes with a new look to tilt traditional retail on its head. While you were shopping (most likely on Amazon) the fourth wave of retail reached maturation – subscription commerce.
During the first wave, “pure play” etailers like Blue Nile and Amazon disrupted traditional retail, forced hundreds if not thousands of stores to close, and sounded a wakeup call for the old guard. In the second wave we saw the emergence of bricks & clicks (or it’s more modern moniker “Omni-channel”) as traditional retailers made costly, but sound investments to develop their ecommerce offerings and integrate them with their store fronts. This investment was a boon for consumers; buying online and picking up in-store satisfied those seeking immediate gratification, while in-store returns reduced some hassle.
This offline / online integration has moved from differentiator to table stakes for consumers forcing even the pure plays to set up shop and enter into agreements they hoped their models would let them avoid – leases. Try shopping a major shopping center and for every empty Sears or JC Penny you’ll find a Bonobos, Indochino, or Warby Parker.
But if there’s one thing you can count on in ecommerce it’s change. Over the past few years we’ve seen the advent of subscription retail. Now you can subscribe, by one definition or another, to a variety of options from meal kits and wine clubs to high-end watches and razors. It’s not just a passing fad, either; subscription commerce is here to stay. According to McKinsey, 15% of online shoppers have signed up for one or more subscriptions to receive products on a recurring basis. It’s easy to see why subscription business are attractive; consumers get choice, value, and convenience, and businesses get built-in reoccurring revenue. Everyone wins.
Trail-blazers like Netflix and Spotify got us comfortable with the idea of access vs. ownership (as well as seeing recurring charges pile up on our credit cards), setting the stage for massive expansion. The new cohort of subscription businesses come in all shapes and sizes, but a few models have emerged.
Not surprisingly the replenishers struck oil first. Armed with a powerful one-two punch of convenience and value, the replenishers land-grabbed the staples you can’t live without. Dollar Shave Club and Harry’s were two early pioneers; disrupting highly verticalized near monopolies (Schick, Gillette) with lower costs and at-your-door convenience. Dollar Shave Club cashed out in 2016 in a billion-dollar sale to industry titan Unilever, but that kind of price tag heralds even higher expectations. In the long run, the success of the deal may hinge on how well DSC can sell the rest of the bathroom and early evidence suggests it’s not a slam dunk. 
Those around prior to the dot com bubble bursting fondly remember the Pets.com sock puppet. That the Pets.com team failed to build a sustainable business is for many a case-study in internet-fueled speculation gone wild, but in hindsight they might have just been too early.
Chewy, a subscription pet food service, has thrived in arguably the same business. For pet owners, a hungry dog is as much a sure thing as death and taxes. It’s that repeat reliability, coupled with the pain of schlepping to the store for a 40lb bag, and the aversion to the pleading eyes of a hungry pooch, that makes dog food so perfect for subscriptions. Also, from a customer acquisition perspective, where Pets.com likely paid to reacquire repeat customers, Chewy acquires them once and sells to them again and again – it’s the model that matters. Chewy, like DSC, had a billion-dollar outcome when PetSmart acquired them for $3.35 billion.
Look around and you’ll find all kinds of replenishment-oriented businesses. Not surprisingly the opportunity awoke the etail dragon – Amazon has gotten into the game offering subscribe and save options on many of their products from toilet paper to water enhancers. With a base of over 100mm loyal Prime subscribers, deep and broad inventory, and unquestionable operational expertise, the Seattle stalwart is perhaps better poised than any to win the replenishment game.
The box clubs
A second subscription model, to emerge is the box club. Offering a curated box of niche-oriented products, the box model is all about sampling, introduction, and interest-specific brand-building. Those first two are key ingredients for box club businesses – how much sampling one is willing to do. If the product depth to usage ratio isn’t right, then churn, the death knell of subscription businesses, looms. Meanwhile, niche-specificity and focused brand-building help keep consumers from straying to the monolithic but more generic Amazon.
Perhaps not surprisingly, our furry friends again rule the day. With over 500k subscribers and a 95% retention rate, Barkbox is the envy of the subscription set. The founders of Barkbox wisely capitalized on multiple trends; the emergence of subscription commerce, an increase in pet ownership for 30 somethings, and a shift in mindset that casts pets as family member. 
Box commerce options abound of course – even in something as seemingly mundane as socks and underwear. L.A. based Me Undies now employs over 100 people focused entirely on shipping around your drawers. Like many a pure play etailer, they opened their first retail location last Fall – in Palo Alto of course. But it’s not all pet toys and underwear, you can get a box for darn near everything from wine and coffee to cosmetics and toiletries.
The box businesses, like all subscription models, are vulnerable to competition. Particularly in an Amazon dominated world, it’s important to think about defensibility – personalization, unique products, and outstanding service is essential.
The access providers – ship, refurb, repeat
The third and final category are the access providers; those who provide rental access to their wares for a fee. Unlike the box clubs, these businesses have a high operational burden as nearly everything they send out is coming back; that’s their model. Rental businesses have been around for years in the physical world; any guy who went to his prom in a rented tux will tell you that. Women’s wear, on the other hand, is another matter entirely. Then we met the couturier to the rental set – Rent the Runway.
Working in RTR’s favor is the cost prohibitive nature of high fashion; it’s far more affordable to rent access to a Vera Wang dress than buy one. Even if you’ve got the checkbook to get in the game, depending on your location, you simply might not have access to the merchandise or suitable tailoring. Rent the Runway solves both issues—cost and convenience—without sacrificing one to salve the other. If you’re wondering how well these businesses can scale, Rent the Runway is now among the largest dry cleaners in the U.S., is profitable, and has plans to expand to China. 
Access based services are there for men too. Have an important client dinner and need to impress? Rent a Rolex from Eleven James. Even Nike has gotten into the act offering parents a subscription to kids shoes with Easy Kicks.
Despite their differences, subscription businesses have several shared challenges that make would-be investors wary. The first is TAM or the ‘total addressable market’ – investors want big outcomes. They’ll want assurances that you’re chasing a whale and have the potential to leverage that audience further – even beyond the subscription model.
The second is the ability to target and acquire new customers cost effectively. Reoccurring revenue is great, but if it costs you over $100 to acquire a customer who you only charge $20 per month you need extraordinary retention rates and likely unrealistic operational efficiencies to earn a profit.
The third is churn. It doesn’t matter how cheaply you can acquire a customer if just as many are sneaking out the back door. VC’s obsess over churn because they know that ultimately their investments’ primary focus must shift from acquisition to retention. When it comes to total subscriber counts, it’s far cheaper to keep the customers you already have.
Fourth, and finally, is the threat of competition. The barriers to entry for subscription businesses are low as evidence by the multitude of players in the top categories. Blue Apron’s stock has fallen precipitously since its IPO in part due to churn, but also a result of competitive challenges from Sun Basket, Plated, Martha Stewart, Freshly, and more. While Rent the Runway has thrived, those seeking sartorial splendor also can turn to Le Tote, Stitch Fix, and Armoire.
With so many subscription businesses the category has arguably matured. Which means we’re due for the next wave of innovation in ecommerce. And we already have a stream of viable contenders.
Shopping stalwarts Amazon are making a big play for voice, and numerous retailers are bringing augmented reality into their stores. Will crypto currency and block chain play a role; changing the face of payments and even collectibles? We’ll look into these questions and more when we forecast what’s next in an upcoming post.